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Corporate Advisory

UNIT 11 CORPORATE ADVISORY SERVICES Services

Objectives
After reading this unit, you should be able to:
l explain the meaning and scope of corporate advisory services;
l identify various corporate advisory services;
l understand the technicalities of the corporate advisory services; and
l appreciate the importance of corporate advisory services.

Structure
11.1 Introduction
11.2 Main Corporate Advisory Services
11.3 Summary
11.4 Self Assessment Questions
11.5 Further Readings

11.1 INTRODUCTION
Corporate advisory services are needed to ensure that a corporate enterprise runs
efficiently at its maximum potential through effective management of financial and
other resources. It also rejuvenates old-line companies and ailing units and guides
existing units in locating areas/activities of growth and diversification. Usually,
Merchant Bankers provide these services. The corporate advisory services represent
an important component of the portfolio of the activities of merchant bankers.
Corporate advisory services, for a business enterprise, include the following services:
a) provide guidance in areas of diversification based on the Government’s
economic and licensing policies,
b) appraising product lines and analyzing their growth and profitability and
forecasting future trends, and rejuvenating old line companies and ailing sick
units by appraising their technology and processes and restructuring their capital
base.
The move to help the ailing industrial units is a well thought out service by the
merchant bankers which remained unattended for years. Now the merchant banks in
India have recognized this gap and started helping ailing companies to overcome their
problems. For example Punjab National Bank has developed special expertise in the
area and contemplates to offer help in this sensitive area in one or more of the
following ways, viz. (i) commissioning of diagnostic studies, (ii) assessment of revival
prospects and preparation of rehabilitation plans, schemes of modernization and
diversification, revamping of the financial and organizational structure, (iii) arranging
approval of the financial institutions/banks for schemes of rehabilitation involving
financial relief etc. assistance in getting soft loans from the financial institutions for
capital expenditure and the requisite credit facilities from the bank, (iv) monitoring of
rehabilitation schemes, and (v) exploring possibilities of takeover of sick units and
assistance in making consequential arrangement and negotiations with financial
institutions/banks and other interests/authorities involved.
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Fee Based Services The above areas are only illustrative of the wide field of corporate advisory services,
which could cover any matter worth the benefit for a corporate unit involving
financial aspects, governmental regulations, policy changes and business
environmental reshuff1es etc. Thus, the scope of the corporate advisory services is
very vast. Its coverage ranges from the subject areas like manageria1 economics,
investment and financial management to corporate Laws and the related legal
aspects.
As a managerial economist a merchant banker has to guide its clients on the aspects
of organizational goals, location of the enterprise, size of the organization and scale of
operations, choice of a product and market survey, forecasting of product, cost
reduction and cost analysis, allocation of resources, investment decisions, capital
management and expenditure control, pricing methods and marketing strategy, etc.
A merchant banker as a financial and investment expert has to guide the corporate
clients in areas covering financial reporting, project measurement, working capital
management, financial requirements and the sources of finance, evaluating financial
alternatives, rate of return and cost of capital, financial rearrangement, reorganization,
mergers and acquisitions.
As an expert in the area of corporate laws a merchant banker should guide on the
legal aspects including the various legal formalities involved in the areas of corporate
finance being raised from the financial institutions, banks and the general public in the
form of loans, new issues of equity or debentures respectively.

11.2 MAIN CORPORATE ADVISORY SERVICES


Some of the main corporate advisory services can be listed as follows:
1) Making of Public Issue and Issue Management.
2) Project Counselling and Pre-Investment Studies.
3) Corporate Restructuring.
4) Capital Structuring and Restructuring.
5) Loan Syndication.
6) Liaison with Foreign Collaborators and making preparation for Joint Ventures.
7) Raising Foreign Currency Loans Euro issues, FCCB’s etc.
8) Mergers and Acquisitions.
9) Making Valuation & Revaluation of Assets.
10) Consultancy for Rehabilitation of Sick Industrial Units.
11) Other Corporate Advisory Services

1) Making of Public Issue and Issue Management


Management of public issues of corporate securities viz. equity shares, preference
shares and debentures or bonds is an act involving mobilization of money resources
from the capital market by way of public issues/offers for sale of equity shares,
preference share, debenture or bond etc. The services in this regard being offered by
the Merchant Banking Divisions or the Indian banks and their subsidiary companies
include the following activities:
i) Obtaining approval for the issue from the SEBI.
ii) Arranging underwriting for the proposed issue.
iii) Drafting and finalizing of the prospectus and obtaining its clearance from the
underwriters, stock exchanges, auditors, solicitors, Registrar of Companies and
38 other necessary consents required for filing the prospectus.
iv) Drafting and finalization of other documents such as application forms, Corporate Advisory
newspaper announcements of the prospectus material and application to the Services
stock exchanges.
v) Selection of the registrar to the issue, printing press, advertising agencies,
brokers and bankers to the issue and finalization of the fees and charges to be
paid to them.
vi) Arranging through the advertising agency the press, brokers and investor’s
conferences.
vii) Co-coordinating the printing, publicity and advertisements relating to the issue,
and work of the registrars to the issue, the receipt and processing of applications
and preparation of the basis of allotment, negotiation of the same with the stock
exchanges and preparation of the register of allotment.
In the case of management of debentures, apart from the above, the Managers to the
Issue have to do the following things:
a) To finalize the terms of the issue which will make the debenture issue attractive;
and
b) To assist in the finalization of the relative security or mortgage documents and
obtaining approval thereto from the Company’s solicitors and trustees.
In issue management, a decision on the size and timing of the public issue in the light
of the market conditions, procuring underwriting support from brokers, institutional
underwriters, i.e. complete liaison with share market functionaries, financial press,
media coverage, arrangement of collection of applications throughout the country
through appointed banks to the issue, are equally important tasks which a merchant
banker traditionally performs. For the successful issue marketing “Stock Exchange
clearances and listing of the securities are the necessary arrangements which are
also assisted to by the merchant banker.

2) Project Counselling and Pre-Investment Studies


Project counseling services relate to ‘project finance and broadly covers the study of
the project and offering advisory assistance on the project viability and procedural
steps for its implementation. It includes the following aspects; general review of the
project ideas/profile, advice on procedural aspects of project implementation, review
of technical feasibility of the project on the basis of the report prepared by own
experts or by the outside consultants, selecting Technical Consultancy Organization
for preparing project reports and market surveys, review of the project reports or
market survey report, preparing project report from financial angle, advice and acting
on various procedural steps including obtaining government consents for
implementation of the project.
For project counseling an evaluation of industrial projects is undertaken to compare
and evaluate alternative variants of technology, of raw materials to be used, of
production capacity, of location and of local production versus import. Project
evaluation is indispensable because resources are scarce and alternative opportunities
in terms of projects exist for commitment of resources. Project selection can only be
rational if it is superior to others in terms of its commercial importance (net financial
benefit accruing to owners of project) or its importance to the nation as a whole. The
various appraisals that are carried out as a part of project appraisal are:
Financial Appraisal: Financial appraisal is concerned with assessing the feasibility
of a new proposal for investment for setting a new project or expansion of existing
productive facilities. In appraising a project, the project’s direct benefit and costs are
estimated at the prevailing market prices. This analysis is used to appraise the viability
of a project as well as to match projects on the basis of their profitability, it may be 39
Fee Based Services noted that financial appraisal is concerned with the measurement of profitability of
resources invested in the project without reference to their source.
An integral aspect of financial appraisal is financial analysis, which takes into account
the financial features of a project including sources of financing. Financial analysis
helps to determine smooth operation of the project over its entire life cycle. The two
major aspects of financial analysis are liquidity analysis and capital structure analysis
for which ratios are employed. Liquidity ratios measure a project’s ability to meet its
short-term obligations. Capital Structure analysis is done to see long term solvency
i.e. the project’s ability to meet long-term commitments to creditors.
Technical Appraisal: Technical appraisal is primarily concerned with the project
concept covering technology, design, scope and content of the plant as well as inputs
and infrastructure facilities envisaged for the project. Basically, the project should be
able to deliver to the market the product from the resources deployed at a cost which
would leave a margin adequate to service the investment and plough-back a
reasonable amount to enable the enterprise to consolidate its position.
Economic Appraisal: Economic appraisal of a project deals with the Impact of the
project economic aggregates. We may classify these under two broad categories.
The first deals with the effect of the project on employment and foreign exchange
and, the second deals with the’ impact of the project on net social benefits or welfare.

3) Corporate Restructuring
The merchant banks provide their expert services for corporate restructuring. When
a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage. This restructuring could be
by way of internal growth or external growth. In simple words, corporate
restructuring is the process by which a company can consolidate its business
operations and strengthen its position for achieving the desired objectives. Corporate
restructuring is done in three different areas. These are:
1) Restructuring at Business Portfolio
2) Financial Restructuring
3) Organizational Restructuring
Restructuring Business Portfolio: In the pre-liberalization era, where license-
permit-Raj existed, Business houses used to try for all sorts of licenses, irrespective
of whether that particular product is fitting into their business portfolio and whether
they have any core competency in producing that product or not. As a result of this
many business houses are rattled with unviable and unrelated business ventures.
After the liberalization the situation has changed and the corporations are forced to
concentrate on their core competencies in order to compete internally and globally.
This had lead many business houses to restructure their Business Portfolios. Business
Portfolio restructuring could be done in a variety of ways like Business Alliances,
Joint Ventures, Mergers, Takeovers, Foreign Franchises, etc.
Financial Restructuring: Financial restructuring aims at designing capital structure
in such a way that it costs least and leaves a major share of the revenue to equity
holders. This also includes planning the liquidity of the company without reducing the
profitability. Traditionally, financial restructuring was meant to restructure debt-equity
mix only. However, now, it includes issues like buy-back of shares, preferential
allotments and issue of warrants.
Organizational Restructuring: This restructuring is needed in order to facilitate
and implement the above two restructurings. The whole restructuring programme
goes waste, if the suitable changes are not made in the organization. These changes
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need to have the cooperation of all levels of employees, only then the restructuring Corporate Advisory
programme will be successful. From above it is clear that in an organization there Services
may be three major areas of restructuring - the mix of the business, the finances and
the organization.

Portfolio Optimization
There are three important decisions to be made - which businesses to retain, which
ones to divest, and how, and which are the new ones, if at all, to enter, and how.
Business Retention Criteria: A variety of criteria for business retention have
emerged from experience and the literature. Some of these have been known for a
long time; tended to be neglected and brought back in a modified, renewed form.
An early criterion was that of distinctive competence. Out of its various strengths, a
firm should focus on those, which gave it an edge over competition. Stay in those
business where one has a competitive edge over existing players and potential new
entrants and can not cope with the bargaining powers of customers and suppliers; the
threat of substitutes and regulatory environment. It has been further buttressed by the
idea of core competence. This is made up of the core skills of a firm, built up over a
number of years.
Divestment Strategies: The above decisions on retention will automatically create
a candid list of businesses for divestment. The process at divestment has to be
handled carefully especially in emerging markets, like India, with many social
concerns:
a) If the business to be divested is already profitable find a suitable buyer at an
attractive price, which can, then, be invested in the core business.
b) If it is losing, break even or low margin, but has, the potential for higher
profitability, find a joint venture partner, hive off and give him equity and
management control, at reasonable price. If the profitability improves, divest
more of the equity at better prices.
c) If the prospects are bleak, or will take too long to turn around, sell to a willing
buyer even at a loss.
d) If a buyer cannot be found, close down, treating all past losses as such costs. Be
guided by the differential, discounted cost benefit analysis.
e) In all the above cases, communicate with employees and unions, keep sharing
information and forecasts, and attempt a consensus. Get the agreement of the
buyer of the business to be divested, or the Joint Venture partner, on taking over
the necessary manpower. Absorb the skilled surplus in the retained business,
with necessary retaining. For the absolute, irreducible surplus, pay appropriate
compensation, with enlightened self-interest.
Diversification Choice: Here also useful need to be retained and renewed. In
emerging markets like India, new industry sectors are being thrown open, for the first
time, for investment by private enterprise. These include core sectors like coal and
aviation; and infrastructure sectors like power, roads, ports and telecommunications.
The concepts of focus and sticking to the knitting perhaps should not be followed
blindly. A new Indian entrant may not have a competitive advantage, but he also does
not have a competitive disadvantage.
Financial Engineering: Three key aspects of the financial model of the firm need
restructuring in the face of the environmental discontinuities of liberalization. These
are - creating value for shareholders; finding the appropriate mix of debt and equity;
and ensuring a competitive cost structure.

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Fee Based Services Shareholders’ Value Creation: Advisors must help companies focus on not just
turnover, gross profits or net profits, but on EPS — Earnings Per Share. This, in turn,
requires optimizing profit after tax, and the number of equity shares. The second
strategy for value creation is, to increase the PE — Price Earnings ratio. To some
extent, a given industry tends to have a certain PE, for a given period, depending on
its prospects. So, management should choose to be in the right industry. Further,
within a given industry, it is possible for a firm to enjoy higher PE. This depends on
the quality of the earnings, arising from the quality of products, processes, brands,
organization and leadership.
Debt-equity Mix: The proportion of equity and debt in the capital structure of a
company also plays a very important role while restructuring. Debt instruments have
committed cash flows in the form of interest payments. Therefore, a firm with little
cash inflows would reduce their debt proportion in the capital structure. Similarly,
equity instruments have the facility of non-dilution of the controlling power. If a firm is
able to generate good returns, the firm may not go for equity as it dilutes their returns
and their control on the company. Therefore, Debt-equity proportion is a very critical
factor in corporate restructuring.
Cost Management: Cost management can be implemented through the following
three steps:
i) Cost Consciousness: Identify and disseminate information on actual costs of
inputs, products, processes, projects and overheads.
ii) Cost Control: Go a step forward by designing and implementing systems of
budgets and standard costs, against which the actual costs can be compared.
iii) Cost Reduction: Further, create systems and climate for continuous cost
reduction, by physically reviewing and challenging the physical and financial
standards themselves.

Organizational Redesign
In parlance, with the business and financial restructuring, the human organization also
needs to be recast. This is needed in both the hardware and software aspects of the
organization: Without the pressures of competition, organizations tend to proliferate
levels, designations, pay scales and manpower. These imbalances reduce human
productivity, creativity and competitiveness. The structures and processes need
change. The organization structure should be critically examined from the point of
view of its ability to respond faster to emerging situations. The organizational
processes need to be strengthened for communication, information sharing,
empowerment, team play and problem solving.
While the right structure, compensation and career growth systems helps in a
turbulent environment healthy organizational culture is required to stay competitive.
The nucleus of culture is the core values. These can be derived, for a particular
organization from the imperatives of meeting its multiple stakeholder’s expectations -
customers, dealers, vendors, shareholders, employees, government and public. Some
common core values are: customer satisfaction/delight; fair dealings; value creation
and innovation.
Activity 1
Why do you think that corporate advisory service be sought before a corporate
restructures its business portfolio?
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4) Capital Structuring and Restructuring Corporate Advisory
Services
Capital structure of a unit is financed by owned capital in the form of promoter’s
contribution and issue of shares and borrowed capital. Net worth represents owned
capital and consists of equity shares and retained profits. Equity share capital, which
is the core capital structure of a company, represents risk capital. Equity shareholders
are the owners of the company, have voting rights, have a say in the management of
the company and possess residuary interest in the company. Equity shares, however,
do not have any right to dividend and the management can skip dividends. The main
questions on the capital structure decision are an appropriate debt equity ratio and
minimizing cost of capital.
Debt-Equity Ratio: The proportion of equity in the capital structure of a company is
determined by the debt-equity ratio stipulated by the Government, the restrictions
imposed by financial institutions and the requirements to be met for listing on stock
exchanges.
Financing Decisions and Cost of Capital: A great deal of controversy has
developed over whether the capital structure of a firm as determined by its financing
decisions, affects its cost of capital. Traditionalists argue that the firm can lower its
cost of capital and increase market value per share by the judicious use of leverage.
However, as the company levers itself and becomes increasingly risky, financial
lenders begin to charge higher interest rates on loans. Moreover, investors penalize
price earnings ratio increasingly, all other things being the same. Beyond a point the
cost of capital begins to rise.
The basic objective behind the capital restructuring services is to “enable projects to
achieve their maximum potential through effective capital structures and suggests
various-strategies-to widen and restructure the capital base, diversify operations and
implement schemes for amalgamations merger or change in business status.
Capital restructuring shall include different steps in different circumstances a client
company is facing. Generally, it may include examining capital structure of the client
company to determine the extent of capitalization. If capitalization is of the reserve by
issue of bonus shares then capital restructuring will include preparing a
comprehensive memorandum to conform to the legal requirements viz. extent of
capitalization of reserve. If the company has excess capital a proposal for buy back
of shares may be prepared. It may cover cases of suggesting mergers, takeovers and
amalgamations involving modernization and diversification of the existing production
systems and the units.
In the capital restructuring the main thrust remains on the analytical side so as to
reincarnate the capital structure ratios, assets restructuring ratios and the debt service
coverage with overall impact on fund generating capacity of the client corporate unit.

5) Loan Syndication
Loan syndication service involves making arrangement for financing a large borrower
by a number of financial institutions. Loan syndication is also known as loan
procurement and project finance service. The main task involved in loan syndication
is to raise the rupee and foreign currency loans with the banks and financial
institutions both in India and abroad. It also arranges to bridge finance and the
resources for cost escalations or cost over-runs.
Broadly, the loan syndication includes the following acts; (a) estimating the total costs,
(b) drawing a financing plan for the total project cost-conforming to the requirements
of the promoters and their collaborators, financial institutions and banks, Government
agencies and underwriters, (c) preparing loan application for financial assistance from
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Fee Based Services term lenders/financial institutions/banks and monitoring their- progress including the
pre-sanction negotiations, (d) selecting the institutions and banks for participation in
financing, (e) follow-up of the term loan application with the financial institutions and
banks and obtaining the satisfaction for their respective share of participation, (f)
arranging bridge finance (g) assisting in completion of formalities for drawl of term
finance sanctioned by institutions expediting legal documentation formalities, drawing
up inter-se agreements etc. prescribed by the participating financial institutions and
banks (h) assessing the working capital requirements, preparing the necessary
application for submission to the bankers and assisting in negotiating for the sanction
of appropriate facilities.

6) Liaison with Foreign Collaborators and making preparation for Joint


Ventures
Merchant banks help locate foreign collaboration and joint venture partners abroad.
They seek to advise on local laws, product risk, Government regulations regarding
shareholdings, exchange relation, taxation, dividends, incentives and subsidies etc.
They also provide guidance on negotiating foreign financial and technical collaboration
agreements with the framework of government policies, rules and regulations,
assistance in the formation of corporate ventures in India in collaboration with suitable
foreign parties.

7) Raising Foreign Currency Loans Euro issues, Foreign Currency


Convertible Bonds etc.
Merchant Banks in India do provide foreign currency finance as merchant banking
services in the following manner: (a) export-import trade finance, (b) Eurocurrency-
loans, (c) Indian joint ventures abroad, and (d) foreign collaborations. The main areas
covered under export 48 finance are as follows: viz. (i) assistance in study of the
turnkey and construction contract projects, (ii) assistance in formulation of the
application for working group, liaison with RBI. ECGC and other institutions,
(iii) syndication of various types of guarantees, letters of credit, pre-shipment credit,
deferred post-shipment credit, bridge loans and other credit facilities, and
(iv) assistance in opening and operating bank accounts abroad.
The main areas of import finance are as follows: viz. (i) arranging foreign currency
loans under buyer’s credit scheme for importing goods, and (ii) arranging deferred
payment guarantees under suppliers credit scheme for importing capital goods.
Foreign banks operating in India through their merchant banking departments are
rendering significant services in respect of foreign currency loans. For example
Grindlays Bank has a worldwide specialization in foreign currency finance covering
supplier/buyer credit.
Merchant banks have the expertise in arranging Euro-currency loans to Indian
corporate units. The Grindlays Bank for making this service available to Indian clients
takes the help of the London based principal merchant bankers viz. Grindlays Brandt
who have experience and expertise in Euro lending. This bank has support from
London-based Euro currency market and the Grindlays Asia Ltd., a Hong Kong
based subsidiary - to step up the growing market in the Pacific Basin.

8) Mergers and Acquisitions


These are specialized services, which the merchant banks have to provide according
to the individual requirement of their clients. These services includes advice and
assistance in negotiating acquisitions and mergers where confidentiality is of the
utmost essence, expert valuation to determine the quantum and nature of
44 consideration and assistance on related legal documentation, official approval, tax
matters, etc, management audits to identify areas of corporate strength and Corporate Advisory
weaknesses to help formulate guidelines and directions for future growth plans, and Services
exploratory studies on a global basis, to locate overseas markets, foreign
collaborations and prospective joint venture associates.

Steps Involved in Merger


1) Formulation of Scheme: Once the ‘prospecting phase’ is over, the companies
seek the help of legal and financial consultants to finalize the details of proposed
scheme of merger.
2) Memorandum of Association: The objective’ clause of amalgamated
(transferee) company should be examined to see if it permits continuation of the
business of amalgamating (transferor) company by it.
3) Intimation to Stock Exchange and Notification: As soon as the offer of
merger is made, the stock exchanges where these companies are listed should be
notified and the fact of the offer should be announced in the newspapers. To ensure
proper disclosure, the announcement is made in the form approved by the regional
stock exchange.
4) Director’s Approval of the Proposed Scheme: The proposed scheme of
merger should be submitted to the Board of Directors of each company for their
approval.
5) Shareholders’ Approval: The scheme, once approved by the Board of Directors,
should be placed before shareholders at a general meeting for their approval. It is not
a legal necessity but the companies, in practice, get the scheme approved by their
shareholders before they file an application for the sanction of the Court.
6) Application to the Court: Now, each company files an application with the High
Court of the state in which registered office of the company is located. The court on
receipt of the application convenes a meeting of the creditors and members of the
company .
7) Meeting Ordered by the Court: The Chairman of such a meeting or any other
person directed by the Court sends individual notices to creditors and members. The
proposed merger scheme is taken as approved if it is passed by a majority in number,
representing three-fourth in value of the members (creditors at creditor’s meeting),
present and voting in person or proxy.
8) Petition for Confirmation of Amalgamation: Once creditors and members pass
the merger scheme, the company within 7 days of the filing of the report by the
Chairman presents a petition for confirmation of the scheme and appropriate orders
and directions under Section 394 of the Companies Act.
9) Order of the Court: The Court, after receiving a report from the Registrar of
Companies and the Official Liquidator, that the affairs of the company have not been
conducted in a manner prejudicial to the interest of its members or of the public,
ensuring that the requisite approvals from the Company Law Board (for altering its
Memorandum of Association), Central Government (under MRTPAct), the Reserve
Bank of India (pursuant to the provisions of FERA) have been obtained and hearing
all the parties shall satisfy itself that the proposed amalgamation is fair and ‘
reasonable. ‘
10) Transfer of Assets and Liabilities, Issue of Shares etc.: Finally, the
companies can implement the scheme by transferring assets and liabilities by issuing
shares and giving any other consideration to the members of the amalgamating
company, as per the scheme of merger.
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Fee Based Services The services of the merchant banks in the context of mergers cover the following
areas, viz. (1) examining pros and cons of proposals for financial reconstruction,
merger and amalgamation, (2) preparing and formulating scheme of financial
restructuring, mergers etc., (3) Obtaining approvals from shareholders, depositors,
creditors, Govt. and other authorities, and (4) monitoring implementation of schemes
of merger and amalgamation.
Mergers and amalgamations inter-alia seeks to carry capital reorganization of the
business enterprises. Merchant bankers’ help is generally sought on the capital
reorganizations and mergers, guidance on and assessment of the financial factors.
Merchant Banks advise on acquisition propositions after careful examination of all
aspects namely balance sheet, articles of associations, provision of company laws,
rules and guidance of trade chambers, the issuing house associations etc. besides
accountants estimates of total assets and legal assistance in drafting.
The merchant bankers usually guide takeover bids, where the Offer is made to the
shareholders of different classes of shares and loan capital of the company involved
in such transaction who have their legal rights requiring legal consideration. Making
them aware of their legal rights and interests becomes the central point of focus for
the merchant banker to advice the client company.

Motives for Mergers


Any acquisition takes place with a number of motivations, culminating in a positive
synergy (2 + 2 = 5 relationship). This means that the performance of the combined
company is more than the sum of the two independent companies. Let us, now,
examine the motives behind takeovers.
A study conducted in USA, identified 12 motives that promote M&A activity. They
are given below in the order of their priority.
Motives for Mergers and Acquisitions
Rank Motives
1. Take advantage of awareness that a company is undervalued.
2. Achieve growth more rapidly than by internal effort.
3. Satisfy market demand for additional product services.
4. Avoid risks of internal start-ups of expansion.
5. Increase earnings per share.
6. Reduce dependence on a single product/service.
7. Acquire market share or position.
8. Off set seasonal or cyclical fluctuations in the present business.
9. Enhance the power and prestige of the owner, CEO, or Management.
10. Increase utilization of present resources-for example Physical plant and
individual skills.
11. Acquire outstanding management or technical personnel.
12. Open new markets for present products/services.

9) Making Valuation and Revaluation of Assets


One of the problems in analyzing a potential merger involves determining the value of
the acquired firm. The value of a firm depends not only upon its earnings but also
upon the operating and financial characteristics of the acquiring firm. It is, therefore;
not possible to place a single value for the acquired firm. Instead a range of values is
determined that would be economically justifiable to the prospective acquirer. The
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two firms negotiate the final price within this range. To determine an acceptable price Corporate Advisory
for a corporation, a number of factors, quantitative as well as qualitative, are relevant. Services
However, placing a value on qualitative factors is difficult such as managerial talent,
strong sales staff, excellent production department, and so on. Therefore, the focus of
determining the firm’s value is on several quantitative variables. The quantitative
factors relate to (a) the value of the assets and (b) the earnings of the firm. Based on
the assets value and earnings, these factors include book value, appraisal value,
market value and earnings per share.
1) Book Value: The book value of a firm is based on the balance sheet value of the
owner’s equity. The book value, as the basis of determining a firm’s value, suffers
from a serious limitation as it is based on the historical costs of the assets of the firm.
Historical costs do not bear a relationship either to the value of the firm or to its ability
to generate earnings. Nevertheless, it is relevant to the determination of a firm’s value
for several reasons: i) it can be used as a starting point to be compared and
complemented by other analyses, ii) in industries where the ability to generate
earnings require large investments in fixed assets, the book value could be a critical
factor where especially plant and equipment are new.
2) Appraisal Value: Appraisal value is another measure of determining a firm’s
value. Such a value is acquired from an independent appraisal agency. This value is
normally based on the replacement cost of assets. The appraisal value has several
merits. In the first place, it is an important factor in special situations such as financial
companies, natural resources enterprises, organizations that have been operating at a
loss. A company operating at a loss may only be worth its liquidation value, which
would approximate the appraisal value. Secondly, the appraisal by independent
appraisers may permit the reduction in accounting goodwill by increasing the
recognized worth of specific assets. Third, appraisal by an independent agency
provides a test of reasonableness of results obtained through methods based upon the
going concern concept. On the other hand, this method of analysis is not adequate by
itself since the value of individual assets may have little relation to the firm’s overall
ability to generate earnings and thus the going concern value of the firm.
3) Market Value: The market value as reflected in the stock market quotations
comprises another approach for estimating the value of a business. The justification
of market value as’ an approximation of true worth of a firm is derived from the fact
that the market quotations by and large indicate the consensus of investors as to the
firm’s earning potentials and corresponding risk. However, the market value of a firm
is determined ‘by ‘investment as well as speculative factors. This value can change,
abruptly as a result of change not only in the analytical factors but also purely
speculative influences and is subject to market sentiments and personal decisions.
Nevertheless, the market value provides a close approximation of the true value of a
firm. In actual practice, a certain percentage of premiums above the market price is
often offered as an inducement for the current owners to sell their shares.
4) Earnings Per Share: Another basis to place a value on a firm is the earnings per
share (EPS). According to this approach, the value of a prospective acquisition is
considered to be a function of the impact of the merger on the EPS. In another
words, the analysis would focus on whether the acquisition will have a positive impact
on the EPS after merger or it will have the effect of diluting it. The future EPS will
affect the firm’s share prices which is a function of price-earnings ratio and EPS.

10) Consultancy for Rehabilitation of Sick Industrial Units


Corporate advisory services include providing help and guidance to the sick industrial
units to overcome their problems. For example Industrial Finance Corporation of
India, which inaugurated its merchant banking division at its Head Office at New
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Fee Based Services Delhi on July I, 1986, envisaged to provide consultancy to ailing and sick industrial
units in addition to other services like Counseling, Issue Management and Credit
Syndication, etc. Merchant banking services to ailing or sick industrial units would
cover the activities of following description:
l Preparing turnaround strategies for ailing or sick units.
l Appraising the technology and processes of ailing or sick units and assessing
their requirements and restructuring their capital base.
l Restructuring the capital base of ailing or sick units.
l Evolving rehabilitation programmes/packages, which can be acceptable to
Financial Institutions and Banks.
l Exploring possibilities for mergers/amalgamations, wherever called for.
l Assisting in obtaining approvals from Board for Industrial and Financial
Reconstruction (BIFR) and other authorities under the Sick Industrial
Companies (Special Provisions) Act, 1985.
l Monitoring implementation of schemes of rehabilitation, mergers and/or
amalgamations.

11) Other Corporate Advisory Services


The corporate advisory services as explained above do not cover all the services
rendered by merchant banks to the corporate world. In fact there cannot be a finite
list of these services. As new problems come up there would be a need for a new
kind of corporate advice, which would solve those problems. Some merchant banks
would take up the challenge and gear up their activities for providing the needed
corporate advice. This leads to the emergence of new corporate advisory services.
Therefore it can be rightly said about merchant banks, “ merchant banks are the
institutions which identify and solve corporate problems”. In addition to the corporate
advisory services explained above the merchant banks may also provide the following
services to the corporate world:
a) Help in Management Decisions.
b) Export Staff Placement and HRD Help.
c) Financial Reengineering.
d) Entrepreneurial Training and Development.
e) Technical Assistance
f) Quality Control & Product Mix.
g) Market Survey and Research.
h) Tax Planning.

11.3 SUMMARY
Corporate advisory services are needed to ensure a corporate enterprise to run
efficiently at its maximum potential through effective management of finance and
other resources. The main Corporate advisory services include the following services
for a business enterprise namely; Making of Public Issue and Issue Management,
Project Counseling and Pre-Investment Studies, Corporate Restructuring, Capital
Structuring & Restructuring, Loan Syndication, Liaison with Foreign Collaborators
and making preparation for Joint Ventures, Raising Foreign Currency Loans Euro
issues, FCCB’s etc., Mergers and Acquisitions, Making Valuation & Revaluation of
Assets and Consultancy for Rehabilitation of Sick Industrial Units. In addition the
48 services like Help in Management Decisions, Export Staff Placement and HRD Help,
Financial Reengineering, Entrepreneurial Training and Development, Technical Corporate Advisory
Assistance, Quality Control & Product Mix, Market Survey and Research and Tax Services
Planning are also included in corporate advisory services.
Management of public issues of corporate securities viz. equity shares, preference
shares and debentures or bonds is an act involving mobilization of money resources
from the capital market by way of public issues/offers for sale of equity shares,
preference share, debenture or bond etc. Project counseling services relate to project
finance and broadly cover the study of the project and offering advisory assistance on
the project viability and procedural steps for its implementation. Corporate
restructuring is the process by which a company can consolidate its business
operations and strengthen its position for achieving the desired objectives. Corporate
restructuring is done in three different areas namely: Restructuring of Business
Portfolio, Financial Restructuring and Organizational Restructuring. The basic
objective behind the capital restructuring services is to “enable projects to achieve
their maximum potential through effective capital structures and reduce cost of
capital. Loan syndication service involves making arrangement for financing a large
borrower by a number of financial institutions. The service of Liaison with Foreign
Collaborators and making preparation for Joint Ventures involves providing guidance
on negotiating foreign financial and technical collaboration agreements within the
framework of government policies, rules and regulations, assistance in the formation
of corporate ventures in India in collaboration with suitable foreign parties. In the
context of mergers and acquisitions the corporate advisory services includes advice
and assistance in negotiating acquisitions and mergers, the quantum and nature of
consideration and assistance on related legal documentation, official approval, tax
matters, etc, management audits to identify areas of corporate strength and
weaknesses to help formulate guidelines and directions for future growth plans, and
exploratory studies on a global basis, to locate overseas markets, foreign
collaborations and prospective joint venture associates. Corporate advisory services
also include providing help and guidance to the sick industrial units to overcome their
problems through turnaround and rehabilitation strategies.

11.4 SELF ASSESSMENT QUESTIONS


1) Why do we need corporate advisory services? Can you make a complete list of
these services? If not what is the reason for the same?
2) What do you mean by corporate advisory services? Explain the main corporate
advisory services?
3) Select a merchant bank of your choice and explain the corporate advisory
services provided by it.
4) What are the factors, which are considered in determining a firm’s value before
taking a merger decision?
5) Why do we need corporate restructuring? Explain the major areas of
restructuring.
6) Write short notes on:
i) Loan syndication
ii) Project appraisal
iii) Mergers versus Restructuring
iv) Capital Restructuring

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Fee Based Services
11.5 FURTHER READINGS
Verma J.C. 1990, Merchant Banking Organisation and Management Tata
McGraw Hill Publishing Company Limited, New Delhi
Verma J.C. 1995, Corporate Mergers Amalgamations & Takeovers, Barat
Publishing House, New Delhi.
Avadhani V.A. 1999, Marketing of Financial Services and Markets, Himalaya
Publishing House, New Delhi.
Bhalla V.K. 2002, Management of Financial Services, Anmol Publications Pvt.
Ltd., New Delhi.
Machiraju H.R. 2003, Merchant Banking, New International Publishers, New Delhi
Bansal Lalit K., 1997, Merchant Banking and Financial Services, Unistar
Publications, Chandigarh.
Nabhi’s Manual of SEBI Guidelines, 2003, Nabhi Publication, New Delhi.
Bharat Manual of SEBI Guidelines, 2003, Bharat Law House Pvt. Ltd., New Delhi.

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